Hailiang Education Group, Inc. (HLG) CEO Ming Wang on Q2 2019 Results - Earnings Call Transcript

Mar. 27, 2019 2:39 PM ETHailiang Education Group Inc. (HLG)
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Hailiang Education Group, Inc. (NASDAQ:HLG) Q2 2019 Earnings Conference Call March 27, 2019 9:00 AM ET

Company Participants

Ming Wang - Chairman and Chief Executive Officer

Jianguo Yu - Chief Financial Officer

Litao Qiu - Secretary

Conference Call Participants

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hailiang Education Group's First Six Months of Fiscal Year 2019 Financial Results Conference Call.

During today's presentation, all parties will be in a listen-only mode. This conference has been recorded today, Wednesday, March 27, 2019.

Joining us today from the Hailiang Education Group are the Company's Chairman and CEO, Mr. Ming Wang; the Company's Chief Financial Officer, Mr. Jianguo Yu; and Company's Board Secretary, Mr. Litao Qiu.

I would like to remind our listeners who are on this call, management's prepared remarks contain Forward-Looking Statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to the questions therefore the Company claims the protection of the Safe Harbor for forward-looking statements as contained in the Private Securities and Litigation Reform Act of 1995. Hailiang Education is under no obligation to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

At this time, I would like to turn the call over to Mr. Ming Wang, Chairman and CEO of Hailiang Education Group. His opening remarks will be delivered in English by the translator Mr. Wang. Please go ahead.

Ming Wang

[Foreign Language]

Thank you, operator, and thanks everyone for joining Hailiang Education first six months of fiscal year 2019 earnings conference call today.

[Foreign Language]

We are pleased to report strong financial results for the first six months of fiscal year 2019. Our revenue increased by 29.8% to RMB652.7 million and net profit increased by 66.4% to RMB129.6 million compared to a same period of last year, as we increased revenue across both our basic educational program and international program and expanded our management educational training, educational trip and overseas studying services.

[Foreign Language]

Hailiang Education provides education and management services for total of 36 school with an aggregate number of 61,146 students enrolled as of December 31, 2018. Of the 36 schools, we own and sponsor nine school with an aggregate number of 22,589 students enrolled. Hailiang Education manages and operates 27 schools with an aggregate number of 38,557 students enrolled.

[Foreign Language]

For the first six months of fiscal year 2019, the revenue from tuition of Hailiang Education’s nine of 38 schools reached RMB544.1 million an increase of 8.2% from RMB502.7 million from the same period last year. The annualized average tuition per student of Hailiang Education’s affiliated schools was RMB54,202 an increase of 9.3% from RMB49,578 from the same period of last year.

We note that the revenue from our international programs significantly increased. As of December 31, 2018 the enrollment in Hailiang Education’s international programs grew to 4555 an increase of 12% from 4066 as of December 31, 2017. The annualized average tuition per student for the international programs reached RMB93, 376 an increase of 11.8% from RMB83, 501 for the same period last year.

[Foreign Language]

We are committed to incrementing interregional development strategies to promote Hailiang Education’s growth through acquisitions. In October 2018 Hailiang Education acquired 51% controlling interest in Zhejiang High School of Arts Company, located in Jiangsu province.

The second high school specialized in arts operated by Hailiang Education. We affirmed our SLI strategy through a corporation with local government, private educations institutes and by providing management services to both private and public schools across China.

For the first six months of fiscal year 2019 Hailiang Education managed and operated an additional 11 management schools contributing to the increase in revenue from providing management services for a total of RMB16.9 million.

In addition, we have continued to expand our services offerings through providing well added services such as educational training, educational trips and overseas studying consultant services.

For the first six months of fiscal year 2019 the revenue from educational training services was RMB59.8 million and the revenue from other services including educational trips and overseas study consulting services was RMB31.9 million.

[Foreign Language]

We have operated by firmly routing our development and reputation in the high quality academic performances of our students. As of March 22, 2019, 101 students from the 2019 graduating course of our international programs have received in the aggregate more than 200 offers from top 100 universities in [Australia] (Ph), the United Kingdom and the United States.

In addition our students have received remarkable achievements in academic competition in the PCR with 55 students from Hailiang Senior Middle School awarded first or higher projects in the national math, physics, chemistry, biology and information technology competition.

Jiaru Shi, a student enrolled in Hailiang Senior Middle School was awarded the sole gold medal in the National Physics Competition of Shaoxing City and received a conditional offer from Peking University.

[Foreign Language]

Hailiang Education have the mission to provide distinguish, specialized and internationalized education. Hailiang Education will continue to carry out its SLI strategy and has internal and external growth, improved academic performance and provide more diversified high quality and satisfactory services to our schools and our students and we will constantly improve performance and bring returns to our shareholders.

[Foreign Language]

Thank you, again for all your support and attention. Next, I will turn the call over to Mr. Jianguo Yu our CFO, who will summarize our first six months of fiscal year 2019 financial results.

On behalf of the management team, Mr. Yu, please go ahead.

Jianguo Yu

Thank you, Mr. Wang. Good morning everyone. Next, on behalf of management team, I will summarize some of the key financial results for the first six months of fiscal year 2019.

For the first six months of fiscal year 2010, our total revenue increased by 29.8% to RMB652.7 million or $94.9 million from RMB502.7 million for the same period of last year. The increase in total revenue was mainly due to the increase in revenue from both basic educational program and international program as well as the new educational training services, new management services and other revenue.

Revenue from basic educational program increased slightly by 0.9% to RMB355.1 million or $51.6 million for the six months ended December 31, 2018, from RMB351.8 million for the same period of last year.

Revenue from the international program increased by 25.2% to RMB189 million or $27.5 million for the six months ended December 31, 2018 from RMB150.9 million for the same period of last year, primarily driven by a increase in number of students enrolled in this program as well as increase in the programs tuitions.

Revenue from educational training services, management services and others were RMB59.8 million RMB or $8.7 million. RMB16.9 million or $2.5 million and RMB31.9 million or $4.6 million for the six months ended December 31, 2018, respectfully. Customer revenue increased by 17.8% to RMB455 million or $66.2 million for the six months ended December 31, 2018, from RMB386.1 million for the same period of last year.

The increase was mainly driven by a higher labor costs associated with our increased employee headcount and an increase compensation level of employees and increase in other costs, primarily due to the launch of educational trips business and overseas study consulting service this is beginning in the second half of fiscal year 2018.

The gross profit increased by 69.6% to RMB197.7 million or $28.8 million for the six months ended December 31, 2018, from RMB116.6 million for the same period of last year. Gross margin was 30.3% for the six months ended December 31, of 2018, compared to 23.2% for the same period of last year.

Selling expenses decrease by 51% to RMB9.9 million or $1.4 million for the six months ended December 31, 2018, from RMB20.2 million for the same period of last year. The decrease was primarily driven by the adoption of IFRS Number 15 Accounting Standard the resulting capitalization of sales commissions.

Administrative expenses increased by 65.5% to RMB32.6 million or $4.7 million for the six months ended December 31, 2018, from RMB19.7 million for the same period of last year. The increase was primarily due to the increase in administrative staff cost and the increase in other general operational expenses generated from newly established subsidiaries.

As a result, operating expenses increases by 6.3% to RMB42.4 million or $6.2 million for the six months ended December 31, 2018 from RMB39.9 million for the same period of last year. Net finance income increased by 104.9% to RMB12.5 million or $1.8 million for the six months ended December 31, 2018, from RMB6.1 million for the same period of last year, mainly driven by increase in the interest income derived from term deposit held at a related party finance entity.

Net profit increased by 66.4% to RMB129.6 million or $18.8 million for the first six months of fiscal year 2019 from RMB77.9 million for the same period of last year. Basic and the diluted earnings per share were RMB0.29 or $0.04 for the six months ended December 31, 2018, compared to basic and diluted earnings per share of RMB0.19 for the same period of last year.

Now, a quick summary of balance sheet and the cash flows. As of December 31, 2018, the Company had cash and cash equivalent of RMB1.24 billion or $181 million compared to RMB812.6 million as of June 30, 2018. Net cash provided by operating activities was RMB646.9 million or $94.1 million for the six months ended December 31, 2018, compared to RMB681.3 million for the same period of last year.

Now, I would like to turn the discuss over to the operator for any questions. Operator.

Question-and-Answer Session

Operator

[Operator Instructions] And today's first question will be from Mr. [Keb Chen] (Ph) a Private Investor. Please go ahead.

Unidentified Analyst

Good evening Mr. Wang and Mr. Yu. My name is Keb Chen an individual investor. Congratulations on the outstanding performance especially on the net profit this year, which had an increase of [66.12%] (Ph) compared with the same period last year. So my question is, could you please explain the main driver of net profit growth and meanwhile I have [indiscernible] more revenue segments were added like educational training, management service. So my second question is how will these new segments being contributing to the whole picture in the future. Thank you.

Ming Wang

[Foreign Language]

There are mainly four reasons, first the increase of tuition as a result of investment in education quality and brand reputation. For the first six months of fiscal year 2019 the annualized average tuition per student of Hailiang Education of related school were RMB54,202, sorry.

The annualized average tuition per student of Hailiang Education’s affiliated schools were RMB54,202 increase of 9.3% from the same period of last year. In addition, the annualized average tuition per student for the international programs reached RMB93,376 an increase of 11.8% from RMB83,501from the same period of last year.

[Foreign Language]

Second the increase of international student enrollment and the change of enrollment structure for the first six months of fiscal year 2019, the enrollment in basic educational programs decreased by 1% compared to the same period of last year.

The enrollment in Hailiang Education’s international programs grew to 4,555 an increase of 12% from 4066. The revenue from international program increased by 25.2% compared to the same period of last year. The development of international programs will continue to make a huge contribution to our revenue in the future.

[Foreign Language]

Third, the development of educational trips, overseas study consulting services and the provision of these services for our manager’s course. For the first six months of fiscal year 2019, the revenue from educational trips and overseas study consulting services was RMB30 million.

[Foreign Language]

The fourth reason is the increase in the number of our manager schools, which lead to the rise in management fee from providing education and management services such as financial, student recruitment, IT, HR services. For the first six months of fiscal year 2019, the management fees reached RMB16.9 million.

[Foreign Language]

We have also confirmed our strategy to increase revenue in the future. The main drive will be the provision of the K-12 education. Secondly, we will continue to provide to the following three business educational training, education and management, education trips and overseas consulting services to increase their contribution to the total revenue in addition to revenue from K-12 education provision.

[Foreign Language]

Thank you.

Operator

[Operator Instructions] Today’s next question comes from [Wendy Kim] (Ph) a Private Investor. Please go ahead.

Unidentified Analyst

Mr. Yu, we saw gross margin increased by 7.10% compared to the same period of last year, so what is the specific reason?

Jianguo Yu

Thank you very much for your question. This is mainly due to the study and the rapid growth of our business income as well as the improvement of Company’s cost control capabilities. More specifically, as we mentioned in our 6-K the increase in our gross margin was mainly due to the increase in the average tuition and the high profitability of our educational training services and our management services. And we expanded our presence through our asset light approach which means we will be able to identify and acquire target in a more cost effective manners and thank you very much.

Operator

Thank you. Today’s next question comes from [Shery Ming] (Ph) a Private Investor. Please go ahead.

Unidentified Analyst

Congratulations to you for the Company’s continued growth and strong financial results. I have a quick question for Mr. Yu. I noticed that the Company has adopted a several new IFRS accounting pronouncements. So could you please introduce the impact on the Company’s financial statement? Thank you.

Jianguo Yu

Sure. I’m glad to give some additional feedback on your questions. We recently adopted IFRS number nine and number 15 in our fiscal year 2019. IFRS 9 is a financial instrument addresses the clarification measurement and the recognitions of a financials asset and financial liabilities. Introduce new rules of hedging accounting and the new imperilment models for the financial asset. We completed our review of IFRS Number Nine and did not identify any significant impact on the reclassification and the measurement of financial instrument.

Regarding our IFRS Number 15, it’s a revenue from contract with customers, introduce a new model for the revenue recognition that is based on the transfer of control. For our Company, the IFRS has the following two major impacts. First, is the nature amount timing and uncertainty of our revenue are reassessed according to the new revenue standard and we determine whether the different revenues are recognized at a point in time or overtime.

Meanwhile certain commissions and the bonus is earned by our employees are considered incremental and the recoverable cost obtaining our contract with the customers. Those cost are amortized over the expected enrollment period, so we recorded net increase in our open repay earnings approximately about RMB18.3 million as of July 1, 2018. And capitalize certain amount of sales commissions on the basis of calculation in fiscal year of 2019. That is my question’s answer

And thank you operator on behalf of entire management team I would like to thank everyone again for joining us today for our conference call. If you have any questions, please contact through e-mail at ir@hailiangeducation.com or reach us our IR counsel Ascent Investor Relations at tina.xiao@ascent-ir.com. Management will respond to your question as soon as possible. We appreciate your interest and support in Hailiang Education and looking forward to speaking with you again next time. Operator, please go ahead.

Operator

Thank you everyone again for attending Hailiang Education Group's first six months of fiscal year 2019 conference call. This concludes our call today and we thank you all for listening in. Good-bye.

Ming Wang

Bye-bye and thank you.

Jianguo Yu

Thank you.

Ming Wang

Thank you very much.

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